2006 Supplement Medicaid and Long Term Care in Michigan

The 2006 Supplement

The Deficit Reduction Act of 2005 (the “Act”) was signed by the President February 8, 2006. Several lawsuits were immediately filed claiming that the Act is unconstitutional due to the fact that the versions of the Act signed by the Senate and House differed (the Senate and House are supposed to approve identical legislation before it can be signed by the President). The possibility that the courts will conclude that the Act is unconstitutional is uncertain at best. All indications are that the Act is here to stay. The Act makes significant changes to Medicaid law (and other laws outside the scope of this 2006 Supplement) and the Medicaid planning discussed in Medicaid and Long Term Care in Michigan.

Effective Date

It is anyone’s guess when the Act will be effective in Michigan. One thing is for certain: transfers prior to February 8, 2006 are governed under the “old” law. Thus, you may rely on the rules as set out in the main text for pre-February 8, 2006 transfers. One school of thought is that the new law applies to transfers made on or after February 8, 2006. Another school of thought is that the law will not be effective until Michigan implements new eligibility rules in its Program Eligibility Manual (“PEM”), which will happen sometime during the summer of 2006 at the earliest. A third theory is that Michigan’s Social Welfare Act must be amended by our legislature, which would occur at a much later date. The million dollar question is how to proceed in light of all of the uncertainty surrounding the effective date of the Act. The answer to that question can only be made on a case-by-case basis taking into consideration your particular facts. At this point, we are advising our clients to not make gifts after February 8, 2006 unless special circumstances apply.

Look-Back Period

The look-back period for all transfers is now 60 months. The look-back period for pre-February 8, 2006 transfers continues to be 36 months under the old law (or 60 months for transfer in trust). If you had a chance to study the main text in much detail, you would realize that the impact of the extended look-back period is rather minimal. Virtually all of the planning done by our office is well within the look-back period. However, the new 60 month look-back takes on new significance in light of the new penalty period starting date described below. The new rules require that all gifts within the 60 month period be aggregated for purposes of calculating the penalty period which begins to at the time of application. Therefore, meticulous records must be kept in order to document all gifts made within 60-months of application.

Divestment Penalty Starting Date

Under the old rules, transfers made within the look-back period were analyzed on a month by month basis with the penalty, if any, running from the month of the gift. This treatment of the penalty period was the fundamental underpinning of gifting within the penalty period and serial divestment.

Under the Act, the penalty period begins to run only when:

The applicant is in the nursing home (which of course means that the individual meets the functional requirement of Medicaid);

Has applied for Medicaid; and

Would otherwise be approved for Medicaid except for the imposition of the transfer penalty.

To assure that the third element is met, the applicant must formally apply for Medicaid and be turned down on the basis that the applicant has met all of the requirements of Medicaid except for the imposition of the transfer penalty due to gifts.

No More Rounding Down and Partial Transfers

Under the Act, states are no longer allowed to “round down or otherwise disregard any fractional period…with respect to the disposal of assets.” Serial divestment worked under the old rules because fractional periods of disqualification were rounded down. Thus, a transfer of assets that was 1.99 times the monthly divestment penalty divisor was rounded down to create one month of ineligibility that began and ended in the month of the gift. A gift in any month of less than the monthly divestment penalty divisor created no penalty at all. Under the new rules, you must aggregate all transfers within the 60 month look-back period and using the monthly divestment penalty divisor in effect at the time of application, calculate the period of disqualification which, unlike under old law, will not be measured in full months. Future disqualification periods will be measured in months and days. Although the Act provides for no rounding, it is our opinion that it is unlikely that Michigan, when drafting its PEMs, will provide for disqualification periods of less than a day.

Annuities

Soon after the publication of Medicaid and Long Term Care in Michigan, the State issued new regulations outlawing balloon annuities. Effective September 1, 2005 the purchase of an annuity is considered a divestment unless all of the following conditions are met:

The annuity is issued by a licensed company;

It is irrevocable;

Solely for the benefit of the applicant or their spouse;

Returns principal and interest within the annuitant’s life expectancy; and

The payments must be in substantially equal monthly payments and continues for the term of the payout.

By its actions, the State effectively eliminated balloon and private annuities as a Medicaid planning tool. In the Act, Congress places additional restrictions on the use of annuities in Medicaid planning. Under the Act, the purchase of an annuity will be treated as a divestment unless the State is named as the “first beneficiary” of the annuity, and the State is entitled to repayment in an amount up to the total Medicaid provided to the “annuitant.” An exception is provided for the applicant’s spouse or disabled or minor child. In such cases, the applicant’s spouse or child may be named as the first beneficiary with the State named as the second beneficiary. Despite the apparent restrictiveness of the new legislation, numerous Medicaid planning opportunities utilizing properly structured annuities remain available. We await issuance of PEMs by the State to know how to optimally structure annuities under the Act.

Limit on Homestead Value

The new rules replace the unlimited exemption allowed on personal residences with a cap of a $500,000 equity limit. The Act, however, makes no changes to the federal requirement that states must recoup (sometimes called “Estate Recovery”) against the home upon the death of the applicant and the applicant’s spouse. As of this writing Michigan has yet to enact an estate recovery law.

Purchase a Life Estate

Under the Act, the purchase of a life estate in another person’s home is a divestment unless the applicant lives in the home for at least one year after the date of the purchase. The new rule would not prohibit the applicant’s spouse from purchasing a life estate in someone else’s home, or from the applicant in fact purchasing such a life estate where he lives for at least one year. Thus, for example, if a family member is willing to take the applicant into their own home for at least a year, the applicant could purchase a life interest in said home. Under these circumstances, a relatively significant transfer of assets could occur without causing any period of disqualification. The Spousal Annuity Trust Lives! Nothing in the Act appears to affect the validity of the spousal annuity trust; a valuable tool for the community spouse. As you will note from the main text, spousal annuity trusts are most effective after the applicant has entered the nursing home.

Half A Loaf Lives

Naturally, an unmarried applicant may not utilize a spousal annuity trust – which could potentially shelter all non-exempt assets. Single applicants may nonetheless save half or more of their non-exempt assets under various Half A Loaf strategies. Half A Loaf works like this: Roughly one-half of the applicant’s assets are gifted to family members after entering the nursing home. The applicant’s remaining assets are used to purchase an actuarially sound immediate annuity. The applicant then applies for Medicaid and is denied on the basis that the applicant has met all of the requirements of Medicaid except for the imposition of the transfer penalty. The penalty is measured by dividing the gift (not the annuity because it has been converted to income) by the divestment penalty divisor. The monthly income from the immediate annuity has been calculated to cover the exact period of disqualification. Result: Medicaid begins to pay the month the immediate annuity runs out, and one-half of the estate is saved.

Conclusion

A great deal of uncertainty surrounds Medicaid planning until Michigan revises its PEMs. The State is allowed a great deal of latitude in interpreting and administering the Act. It is possible that some of the strategies discussed in this 2006 Supplement will be affected by the new PEMs and, likewise, new planning opportunities will be created. Nothing in this 2006 Supplement should be considered legal advice. You should only proceed after consulting with a qualified Elder Law attorney.
Sincerely, P. Mark Accettura

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